Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Evans & Sutherland Computer Corporation, referred to in these notes as “Evans & Sutherland,” “E&S,” or the “Company,” produces high-quality advanced visual display systems used primarily in full-dome video projection applications, dome projection screens and dome architectural treatments. E&S also produces unique content for planetariums, schools, science centers and other educational institutions and entertainment venues. The Company’s products include state of the art planetarium and dome theater systems consisting of proprietary hardware and software, and other unique visual display systems primarily used to project digital video on large curved surfaces. Additionally, E&S manufactures and installs metal domes with customized optical coatings and acoustical properties that are used for planetarium and dome theaters as well as many other unique custom applications. The Company operates in one business segment, which is the visual simulation market.
Basis of Presentation
The consolidated financial statements include the accounts of Evans & Sutherland and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting estimates that require management’s most difficult and subjective judgments include revenue recognition based on the percentage-of-completion method, inventory reserves, allowance for doubtful accounts receivable, allowance for deferred income tax assets, impairment of long-lived assets, pension and retirement obligations and useful lives of depreciable assets. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three or fewer months to be cash equivalents. The Company maintains cash balances in bank accounts that, at times, exceed federally insured limits. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant risk with respect to cash. As of December 31, 2018, cash deposits as reported by the banks, including restricted cash, exceeded the federally insured limits by approximately $8,095.
Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statements of cash flows.
|
|
2018
|
|
2017
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ 8,365
|
|
$ 5,276
|
Restricted cash
|
|
220
|
|
312
|
Total cash, cash equivalents, and restricted cash
|
|
|
|
|
shown in the statements of cash flows
|
|
$ 8,585
|
|
$ 5,588
|
Amounts included in restricted cash represent those required to be set aside by a contractual agreement. Restricted cash that guarantees letters of credit that mature or expire within one year is reported as a current asset. Restricted cash that guarantees letters of credit that mature or expire after more than one year is reported as a long-term asset.
Trade Accounts Receivable
In the normal course of business, E&S provides unsecured credit terms to its customers. Accordingly, the Company maintains an allowance for doubtful accounts for possible losses on uncollectible accounts receivable. The
21
Company routinely analyzes accounts receivable and costs and estimated earnings in excess of billings, and considers history, customer creditworthiness, facts and circumstances specific to outstanding balances, current economic trends, and changes in payment terms when evaluating the adequacy of the allowance for doubtful accounts receivable. Changes in these factors could result in material differences to bad debt expense. Past due balances are determined based on contractual terms and are reviewed individually for collectability. Uncollectible accounts receivable are charged against the allowance for doubtful accounts when management determines the probability of collection is remote.
The table below represents changes in E&S’s allowance for doubtful accounts receivable for the years ended December 31:
|
|
2018
|
|
2017
|
|
|
|
|
|
Beginning balance
|
|
$ 109
|
|
$ 259
|
Write-off of accounts receivable
|
|
-
|
|
(7)
|
Increase (decrease) in estimated losses on accounts receivable
|
|
48
|
|
(143)
|
Ending balance
|
|
$ 157
|
|
$ 109
|
Inventories
Inventories include materials at standard costs, which approximate actual costs, as well as inventoried costs on programs and long-term contracts. Inventoried costs include material, direct engineering and production costs, and applicable overhead, not in excess of estimated market value. Spare parts and general stock materials are stated at cost not in excess of market value. E&S periodically reviews inventories for excess supply, obsolescence, and valuations above estimated realizable amounts, and provides a reserve sufficient to reduce inventories to net realizable values. Revisions of these estimates could impact net loss.
During the years ended December 31, 2018 and 2017, E&S recognized impairment losses on inventory of $427 and $105, respectively.
Inventories as of December 31, were as follows:
|
|
2018
|
|
2017
|
|
|
|
|
|
Raw materials
|
|
$ 5,979
|
|
$ 5,458
|
Work in process
|
|
116
|
|
1,011
|
Finished goods
|
|
323
|
|
423
|
Reserve for obsolete inventory
|
|
(3,346)
|
|
(2,919)
|
Inventories, net
|
|
$ 3,072
|
|
$ 3,973
|
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method based on the estimated useful lives of the related assets. Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized. Leasehold improvements are assigned useful lives based on the shorter of their useful lives or the term of the related leases, including renewal options likely to be exercised. Routine maintenance, repairs and renewal costs are expensed as incurred. When property is retired or otherwise disposed of, the carrying values are removed from the property and equipment and related accumulated depreciation and amortization accounts. Depreciation and amortization are included in cost of sales, research and development or selling, general and administrative expenses depending on the nature of the asset.
Depreciation expense was $263 and $259 for the years ended December 31, 2018 and 2017, respectively. The cost and estimated useful lives of property and equipment and the total accumulated depreciation were as follows as of December 31:
22
|
Estimated
|
|
|
|
|
|
Useful Lives
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Land
|
n/a
|
|
$ 2,250
|
|
$ 2,250
|
Buildings and improvements
|
5 - 40 years
|
|
3,065
|
|
3,065
|
Manufacturing machinery and equipment
|
3 - 8 years
|
|
4,554
|
|
5,582
|
Office furniture and equipment
|
3 - 8 years
|
|
630
|
|
779
|
Total
|
|
|
10,499
|
|
11,676
|
Less accumulated depreciation
|
|
|
(6,104)
|
|
(7,149)
|
Net property and equipment
|
|
|
$ 4,395
|
|
$ 4,527
|
Goodwill
The Company tests its recorded goodwill for impairment on an annual basis during the fourth quarter, or more often if indicators of potential impairment exist, by determining if the carrying value of each reporting unit exceeds its estimated fair value. Factors that could trigger impairment include, but are not limited to, underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the Company’s overall business and significant negative industry or economic trends. Future impairment reviews may require write-downs in the Company’s goodwill and could have a material adverse impact on the Company’s operating results for the periods in which such write-downs occur.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when events or changes in circumstances indicate the carrying values of the assets may not be fully recoverable. When this occurs, the Company reviews the values assigned to long-lived assets by analyzing the anticipated, undiscounted cash flows they generate. When the expected future undiscounted cash flows from these assets do not exceed their carrying values, the Company estimates the fair values of such assets. Impairment is recognized to the extent the carrying values of the assets exceed their estimated fair values. Assets held for sale are reported at the lower of their carrying values or fair values less costs to sell.
Warranty Reserve
E&S provides a warranty reserve for estimated future costs of servicing products under warranty agreements extending for periods from 90 days to one year. Anticipated costs for product warranties are based upon estimates derived from experience factors and are recorded at the time of sale or over the period revenues are recognized for long-term contracts. Warranty reserves are classified as accrued liabilities in the accompanying consolidated balance sheets.
The table below represents changes in E&S’s warranty reserve for the years ended December 31:
|
|
2018
|
|
2017
|
|
|
|
|
|
Beginning balance
|
|
$ 139
|
|
$ 123
|
Additions to warranty reserve
|
|
166
|
|
249
|
Warranty costs
|
|
(134)
|
|
(233)
|
Ending balance
|
|
$ 171
|
|
$ 139
|
Stock-Based Compensation
The Company records compensation expense in the financial statements for stock-based awards based on the grant date fair value of those awards that are ultimately expected to vest. As such, the value of the award is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company determines the grant date fair value of the options using the Black-Scholes option-pricing model. Stock-based compensation expense is recognized over the requisite service periods of the
23
awards on a ratable basis, which recognizes expense for each vesting tranche of each grant starting on the grant date and finishing on the vest date for that tranche.
Net Income per Common Share
Basic net income per common share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted net income per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares include shares that may be issued by the Company for outstanding stock options determined using the treasury stock method. In periods resulting in a net loss, potential common shares are anti-dilutive and therefore are not included. Net income per common share has been computed based on the following:
|
2018
|
|
2017
|
|
|
|
|
Numerator
|
|
|
|
Net Income
|
$ 3,747
|
|
$ 1,481
|
|
|
|
|
Denominator
|
|
|
|
Weighted-average number of common shares outstanding - basic
|
11,353
|
|
11,353
|
Incremental shares assumed for stock options
|
625
|
|
661
|
Weighted-average number of common shares outstanding - dilutive
|
11,978
|
|
12,014
|
Basic net income per common share
|
$ 0.33
|
|
$ 0.13
|
Diluted net income per common share
|
$ 0.31
|
|
$ 0.12
|
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases and operating loss and income tax credit carry-forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in income tax rates is recognized in the period that includes the enactment date.
Other Comprehensive Income
On a net basis for 2018 and 2017, there were deferred income tax assets resulting from items reflected in comprehensive income. However, E&S has determined that it is more likely than not that it will not realize such net deferred income tax assets and has therefore established a valuation allowance against the full amount of the net deferred income tax assets. Accordingly, the net income tax effect of the items included in other comprehensive income is zero. Therefore, the Company has included no income tax expense or benefit in relation to items reflected in other comprehensive income. The accumulated other comprehensive loss at the end of 2017 and 2018 consists of minimum pension liability attributable to the Supplemental Executive Retirement Plan (“SERP”) (see Note 7).
24
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 changes the accounting for leases. In particular, lessees will recognize lease assets and lease liabilities for operating leases. This update will have a minimal effect on lessor accounting. ASU 2016-02 is effective in the first quarter of the fiscal year ending 2019. The Company is currently assessing the impact on its financial reporting of implementing this guidance.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash
(“ASU 2016-18”). ASU 2016-18 changes the cash flow presentation and disclosures of restricted cash. The
Company implemented this update in the presented financial statements.
Note 2 – Revenue
The Company adopted Topic 606,
Revenue from Contracts with Customers
, with a date of the initial application of January 1, 2018. The Company applied Topic 606 using the cumulative effect method, and accordingly recognized the cumulative effect of initially applying Topic 606 as an
adjustment to the opening balance of stockholders’ equity at January 1, 2018. As a result, the Company used different methods for recognizing revenue in each of the periods presented as detailed below.
Products and services
The Company generates its revenue through manufacturing, integrating, distributing, and servicing its various products consisting of: Audio-Visual Systems, Domes, Show Content, and Maintenance and Service contracts. All of the Company’s products are sold worldwide.
Audio-Visual Systems consist of standard and customized hardware components integrated with proprietary software. The Audio-Visual Systems are most often used as the primary equipment for planetarium theaters operated by educational institutions. Occasionally, Audio-Visual Systems are sold for other special purposes at various visitor attractions. Audio-Visual System sales include upgrades of existing systems and sub-systems. Sales of typical Audio-Visual Systems range from $200 to $2,000.
Domes are hemispheric or curved metal structures fabricated from mostly aluminum metal tubing and sheets at the Company’s factory. Some Dome components have a special optical coating applied by a partner vendor. The Dome components are shipped to a customer site and are assembled and installed in or on the customer’s building by Company employees or subcontractors. Domes are often sold with an Audio-Visual System to serve as projection screens but can also be sold separately. Most often a Dome sold separately is used as a projection screen but occasionally they are used as architectural treatments. Dome projection screens sold separately can be used for existing planetarium theaters or other special visitor attractions such as theme park rides. A typical Dome is a hemispheric structure ranging from 40 to 70 feet in diameter but Domes are also produced in various curved shapes and sizes to accommodate a special purpose. Dome sales typically range from $200 to $1,000 but occasionally exceed this range for sales of multiple complex structures priced at several million dollars.
Show Content is sold under a license agreement. Show Content can also be sold with or without an Audio-Visual System. Most Show Content is sold to planetarium theaters which historically have been used as astronomical simulators; however, digital technologies have expanded capabilities to display a wider variety of content. The Company’s Show Content products include a variety of mostly educational topics including but not limited to astronomy, earth sciences, history, and biology. The Company sells Show Content it produces as well as content produced by other entities under distribution arrangements. Show Content sales typically range from $2 to $80.
Maintenance and Service is sold in the form of spare parts or service agreements that sometimes include an extended warranty feature. Maintenance and Service is sold predominantly for Audio-Visual Systems. Dome products require less maintenance but can benefit from an occasional cleaning. Part sales typically range from $1 to $100. Maintenance and Service contract sales typically range from $3 to $200.
25
The Company sells and markets its products through its employee sales team. For many foreign sales, the employee team is assisted by commissioned agents based in the locale of the customer. The Company markets its products through a network of industry associations and by messaging to the designers of planetarium theaters and visitor attractions. For Dome sales other than for planetarium projects, the Company relies on relationships developed with many satisfied customers in the architectural, visitor attraction, and theme park community. Customer decisions are based on price, product features and the experience of the supplier.
Most of the Company’s revenue comes from sales of Audio-Visual Systems and Domes for planetarium theaters or other visitor attractions. Sales can be to existing theaters interested in upgrading or to a new theater. Service Support and Show Content provide a reasonably steady stream of repeat revenue from existing customers which supplements the revenue from Audio-Visual Systems and Domes. As such, the Company relies on Audio-Visual Systems and Domes sales to new projects to generate the volume of revenue necessary sustain the business. Customer sales sometimes can take years to consummate from the initial planning stage to the award of the contract. Often there is a competitive bid process with multiple suppliers involved.
Customer contracts generally provide for progress payments which in many cases provides advance funding for the cost of performance. In some cases, customers hold a small portion of the contract payment for performance security through the warranty. The Company may also be required to provide performance security in the form of a surety bond or international standby letter of credit. Most customers are large public institutions, government or quasi-government entities, and large theme park entities, which carry little credit risk.
Multiple Performance Obligations
Some contracts include multiple performance obligations. Significant performance obligations commonly include the supply of Audio-Visual Systems, Domes, Show Content and various Service deliverables. Revenue earned on performance obligations are allocated to each deliverable based on the relative fair values. Relative fair values of performance obligations are generally determined based on actual and estimated selling price. Completion times of such contract obligations vary but typically occur within a three to twelve-month time period.
Revenue Recognition Methods for 2017
Percentage of Completion
. In arrangements that are longer in term and require significant production, modification or customization, revenue is recognized using
the percentage-of-completion method. In applying this method, the Company utilizes cost-to-cost methodology whereby it estimates the percent complete by calculating the ratio of costs incurred (consisting of material, labor and subcontracting costs, as well as an allocation of indirect costs) for each contract to its total anticipated costs for that contract. This ratio is then utilized to determine the amount of gross profit earned based on the Company’s estimate of total gross profit at completion for each contract. The Company routinely reviews estimates related to percentage-of-completion contracts and adjusts for changes in the period the revisions are made. Billings on uncompleted percentage-of-completion contracts may be greater than or less than revenue recognized and are recorded as an asset or liability in the accompanying condensed consolidated balance sheets.
Completed Contract
. Contract arrangements which typically require a relatively short period of time to complete the production, modification, and customization of products are accounted for using the completed contract method. Accordingly, revenue is recognized upon delivery of the completed product, provided persuasive evidence of an arrangement exists, title and risk of loss have transferred to the customer, the fee is fixed or determinable, and collection is reasonably assured.
Other
. Other revenue consists primarily of amounts earned under maintenance contracts that are generally sold as a single element. Revenue from product maintenance contracts, including separately priced extended warranty contracts, is deferred and recognized over the period of performance under the contract.
Revenue Recognition Methods for 2018
In 2018, upon adoption of Topic 606, the Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The following describes the methods used to recognize revenue under the application of Topic 606.
26
Audio-Visual Systems
.
The Company’s
Audio-Visual Systems are sold for a fixed price under non-cancelable contracts. Because systems are often designed with unique features and constantly changing technology components, there is no practical alternative use for a system after it is sold. Under Topic 606, if an entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for the performance completed to date, then its performance obligation is satisfied and control of the product transfers over time. If control transfers over time, an entity selects a method to measure progress that is consistent with the objective of depicting its performance and recognizes revenue accordingly. The Company has determined the percentage-of-completion method utilizing cost-to-cost methodology best depicts the measure of progress because it tracks the utilization of total resources to fulfill the obligation. This same method has been used prior to the adoption of Topic 606 for recognizing revenue on certain Audio-Visual System sales and most Dome sales. With the adoption of Topic 606, essentially all Audio-Visual Systems and subsystem sales will use the percentage-of-completion method for revenue recognition.
Domes.
The Company’s
Domes are sold for a fixed price under non-cancelable contracts. Because Domes have custom design and interface features, there is no practical alternative use for a Dome after it is sold. As discussed above under Audio-Visual Systems, when there is no alternative use for the product and there is an enforceable right to payment, Topic 606 requires revenue to be recognized over the time of performance. Accordingly, the Company continues to use the percentage-of-completion method utilizing cost-to-cost methodology for the recognition of revenue for the sale of Domes, as it has prior to the adoption of Topic 606.
Show Content.
Show Content is sold under various license agreements, most often for a fixed price, but occasionally for a variable share of the customer’s theater revenue. Sales of Show Content require no future obligations by the Company after delivery. The Company recognizes the revenue for fixed price Show Content licenses upon the execution of the license agreement and delivery of media since that is the time control and benefit of the Show Content is transferred. Under Topic 606, an entity does not recognize revenue for the variable amounts related to a royalty until a customer’s subsequent sales or usage occurs. Accordingly, revenue from the variable share of the customer’s theater revenue is recognized when realized. The method used by the Company for recognizing Show Content revenue has not changed with the adoption of Topic 606.
Maintenance and Service
.
Maintenance and Service revenue consists of parts sales and service contracts. Parts sales are recognized upon shipment which is when the control and benefit transfers to the customer. Service contracts are sold for a fixed price and provide the customer with various levels of preventive service, support and limited warranty protection. Under Topic 606, the revenue for service contracts is recognized ratably over the term of the contract or upon delivery of a service specified in the contract. The method used by the Company for recognizing Maintenance and Service revenue has not changed with the adoption of Topic 606.
Contract Acquisition Costs
Contract acquisition costs consist of expenditures of Company employee and other resources and, in some cases, the payment of sales commissions to non-employee agents. Expenditures of Company employee and other resources are costs that would be incurred regardless of whether the contract is obtained, are not recoverable, and therefore are expensed as they are incurred under Topic 606. Sales commissions paid to agents are incurred only if the contract is obtained and therefore are incremental costs of acquiring the contract. Rather than capitalize the cost of sales commissions, the Company has elected to expense sales commissions as incurred under the practical expedient permitted by Topic 606, whereby expensing is permitted when the amortization period of the asset that the entity otherwise would have recognized is one year or less.
Disaggregation of Revenue
In the following table, revenue reported for the year ended December 31, 2018 under Topic 606 is disaggregated by primary geographical market, major product line, timing of revenue recognition and product application.
27
Product Application
|
Planetarium Theaters
|
Other Visitor Attractions
|
Architectural Treatments
|
Total
|
|
|
|
|
|
Primary Geographic Area:
|
|
|
|
|
|
|
|
|
|
North America
|
$ 23,443
|
$ 1,452
|
$ 1,022
|
$ 25,917
|
Europe
|
2,607
|
1,175
|
-
|
3,782
|
Asia
|
4,077
|
1,911
|
-
|
5,988
|
Other
|
1,506
|
-
|
-
|
1,506
|
|
$ 31,633
|
$ 4,538
|
$ 1,022
|
$ 37,193
|
|
|
|
|
|
Products:
|
|
|
|
|
|
|
|
|
|
Audio-Visual Systems
|
$ 21,315
|
$ 1,646
|
$ -
|
$ 22,961
|
Domes
|
5,686
|
2,892
|
1,022
|
9,600
|
Show Content
|
2,225
|
-
|
-
|
2,225
|
Maintenance and Service
|
2,407
|
-
|
-
|
2,407
|
|
$ 31,633
|
$ 4,538
|
$ 1,022
|
$ 37,193
|
|
|
|
|
|
Timing of revenue recognition:
|
|
|
|
|
|
|
|
|
|
Goods transferred at point in time
|
$ 2,935
|
$ -
|
$ -
|
$ 2,935
|
Goods and services transferred over time
|
28,698
|
4,538
|
1,022
|
34,258
|
|
$ 31,633
|
$ 4,538
|
$ 1,022
|
$ 37,193
|
Contract Balances
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers as of December 31, 2018 and January 1, 2018:
|
December 31, 2018
|
January 1, 2018
|
|
|
|
Receivables reported as accounts receivable, net
|
$ 3,250
|
$ 3,794
|
Contract revenue in excess of billings
|
3,484
|
3,517
|
Billings in excess of contract revenue
|
5,959
|
6,265
|
28
Significant changes in the contract assets and the contract liabilities balances during the year are as follows:
|
Contract Assets
|
Contract Liabilities
|
|
|
|
Revenue recognized that was included in the contract liability balance at the beginning of the year
|
|
$ (4,697)
|
|
|
|
Increases due to amounts billed to customers, excluding amounts recognized as revenue during the year
|
|
$ 4,391
|
|
|
|
Transferred to receivables from contract assets recognized at the beginning of the year
|
$ (3,404)
|
|
|
|
|
Increases as a result of revenue recognized, excluding amounts transferred to receivables during the year
|
$ 3,371
|
|
Contract revenue in excess of billings are contract assets that arise when revenue recognized on a contract exceeds the cumulative progress billings. Contracts generally provide for an enforceable right to payment for performance completed to date but do not necessarily have a present right to consideration payment for performance completed until the event that triggers the progress billing. The contract assets are transferred to receivables when the rights to payment occur and amounts are billed. Billings in excess of contract revenue are contract liabilities that arise when progress billings on a contract exceed the revenue recognized. Contract liabilities are relieved as the performance obligation is completed and revenue is recognized. Progress billings vary among contracts and can be triggered by chronological milestones, performance events or other various measurements of performance.
Backlog of Remaining Customer Performance Obligations
The following table includes estimated revenue expected to be recognized and recorded as sales in the future from the backlog of performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.
|
2019
|
2020
|
2021
|
2022
|
2023
|
|
|
|
|
|
|
Sales
|
$
15,881
|
$
678
|
$
546
|
$
170
|
$
91
|
Note 3 – Changes in Accounting Policies
Except for the changes disclosed in Note 1 under revenue recognition, the Company has consistently applied the accounting policies to both periods presented in these condensed consolidated financial statements. The Company adopted Topic 606,
Revenue from Contracts with Customers,
with a date of initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below. The Company applied Topic 606 using the cumulative effect method and accordingly recognized the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under prior accounting rules.
29
The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements for year ended December 31, 2018:
CONDENSED CONSOLIDATED BALANCE SHEETS
|
Impact of changes in accounting policies
|
|
|
|
|
|
|
Balances
|
|
|
|
|
|
|
without
|
|
|
|
|
|
|
adoption of
|
December 31, 2018
|
|
As reported
|
|
Adjustments
|
|
Topic 606
|
Cash and cash equivalents
|
|
$ 8,365
|
|
$ -
|
|
$ 8,365
|
Restricted cash
|
|
220
|
|
-
|
|
220
|
Contract revenue in excess of billings
|
|
3,484
|
|
(1,130)
|
|
2,354
|
Inventories, net
|
|
3,072
|
|
712
|
|
3,784
|
Others
|
|
12,020
|
|
-
|
|
12,020
|
Total assets
|
|
27,161
|
|
(418)
|
|
26,743
|
|
|
|
|
|
|
|
Billings in excess of contract revenue
|
|
5,959
|
|
44
|
|
6,003
|
Others
|
|
13,198
|
|
-
|
|
13,198
|
Total liabilities
|
|
19,157
|
|
44
|
|
19,201
|
Accumulated deficit
|
|
(42,778)
|
|
(462)
|
|
(43,240)
|
Others
|
|
50,782
|
|
|
|
50,782
|
Total stockholders’ equity
|
|
8,004
|
|
(462)
|
|
7,542
|
Total liabilities and stockholders’ equity
|
|
$ 27,161
|
|
$ (418)
|
|
$ 26,743
|
|
|
|
|
|
|
Balances
|
|
|
|
|
|
|
without
|
|
|
|
|
|
|
adoption of
|
For the year ended December 31, 2018
|
|
As reported
|
|
Adjustments
|
|
Topic 606
|
Sales
|
|
$ 37,193
|
|
$ 432
|
|
$ 37,625
|
Cost of sales
|
|
(23,469)
|
|
(211)
|
|
(23,680)
|
Selling, general and administrative
|
|
(6,561)
|
|
-
|
|
(6,561)
|
Income tax expense
|
|
(21)
|
|
-
|
|
(21)
|
Others
|
|
(3,395)
|
|
-
|
|
(3,395)
|
Net income
|
|
$ 3,747
|
|
$ 221
|
|
$ 3,968
|
30
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Impact of changes in accounting policies
|
|
|
|
|
|
|
Balances
|
|
|
|
|
|
|
without
|
|
|
|
|
|
|
adoption of
|
For the year ended December 31, 2018
|
|
As reported
|
|
Adjustments
|
|
Topic 606
|
Net income
|
|
$ 3,747
|
|
$ 221
|
|
$ 3,968
|
Adjustments to reconcile net income to
|
|
|
|
|
|
|
net cash used in operating activities:
|
|
|
|
|
|
|
Other
|
|
1,057
|
|
-
|
|
1,057
|
Changes in:
|
|
|
|
|
|
|
Inventories
|
|
(449)
|
|
211
|
|
(238)
|
Contract revenue in excess of billings
|
|
33
|
|
1,130
|
|
1,163
|
Billings in excess of contract revenue
|
|
(306)
|
|
(1,562)
|
|
(1,868)
|
Other
|
|
(353)
|
|
-
|
|
(353)
|
Net cash from operating activities
|
|
3,729
|
|
-
|
|
3,729
|
Net cash from investing activities
|
|
(101)
|
|
-
|
|
(101)
|
Net cash from financing activities
|
|
$ (631)
|
|
$ -
|
|
$ (631)
|
Note 4 – Goodwill
Goodwill of $635 resulted from the acquisition of the Company’s wholly owned subsidiary, Spitz, and was measured as the excess of the $2,884 purchase consideration paid over the fair value of the net assets acquired. The Company has made its annual assessment of impairment of goodwill and has concluded that goodwill is not impaired as of December 31, 2018.
Note 5 – Lease Receivable
In 2016, the Company entered into a lease agreement with a customer whereby the Company will be the Lessor and the customer will be the lessee of a Planetarium System produced, delivered and installed by the Company. The lease term is 5 years and requires the customer to make rent payments to the Company over the lease term in accordance with the fixed schedule in the agreement. The equipment will be returned to the Company at the end of the lease term at which time the Company estimates that the system will have no residual value. The customer obtained control of the leased assets upon delivery and acceptance of the system on December 7, 2016. The lease is accounted for as a sales-type lease since the lease term is for substantially all of the economic life of the system, the present value of the lease payments amounts to substantially all of the fair value of the underlying assets, and the customer will retain the control with substantially all of the risks and awards of ownership of the system. The discounted present value of the payments to be made under the lease agreement, using an annual rate of 6%, amounts to $1,754. This amount represents the fair value of the equipment of $1,678 and the maintenance services E&S is to provide over the terms of the lease valued at $76. In 2016, the Company recorded the sale of the system of $1,678 and $76 of deferred revenue representing the value of the maintenance services. In 2017, the Company collected $307 in lease payments of which $55 was recorded as interest income and $252 as principal reduction of the lease receivable. In 2018, the Company collected $307 in lease payments of which $60 was recorded as interest income and $247 as principal reduction of the lease receivable.
31
The balance of lease receivable as of December 31, 2018 and 2017 is recorded as follows:
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Lease receivable
|
|
|
$ 262
|
|
$ 247
|
Lease receivable long term
|
|
|
574
|
|
836
|
Total
|
|
|
$ 836
|
|
$ 1,083
|
Note 6– Leases and deferred gain on disposal of building assets
The Company occupies real property and uses certain equipment under lease arrangements that are accounted for as operating leases. The Company’s real property leases contain escalation clauses. Rental expense for all operating leases for 2018 and 2017 was $151 and $148, respectively.
In November 2014, the Company agreed to an extension of its lease for its corporate office buildings and its interest in the lease for the land occupied by the buildings for a term of 5 years. Base annual rent was $549 until April 1, 2018 when the base annual rent increased to $570. The annual rent expense on a straight-line basis is $555. The new lease obligation is recorded as an operating lease for a term of five years which commenced November 1, 2014. The accounting for the lease extension resulted in a $620 gain on the disposition of leased assets under the prior lease which was deferred and is being amortized over the five-year term of the new operating lease. There was also a $1,526 gain from the extinguishment of a deferred rent credit related to the underlying land lease which is being amortized over the five-year term of the new operating lease. The amortization of the deferred gain and deferred rent credit reduces the rent expense attributable to the cash rent payments.
Future minimum rent expense payments under the new operating lease and the remaining deferred gain from the disposal of the building assets and deferred rent credit to be recognized are as follows:
Years Ending
|
|
Minimum Lease
|
|
Gain on
|
|
Deferred
|
|
Net Rent
|
December 31,
|
|
Payments
|
|
Building
|
|
Rent Credit
|
|
Expense
|
|
|
|
|
|
|
|
|
|
2019
|
|
475
|
|
(106)
|
|
(264)
|
|
105
|
Total
|
|
$ 475
|
|
$ (106)
|
|
$ (264)
|
|
$ 105
|
There are no other lease obligations that have initial or remaining non-cancelable lease terms in excess of one year.
Note 7 - Employee Retirement Benefit Plans
Settlement of Pension Plan Liabilities
On April 21, 2015, the Company, as the administrator of its qualified defined benefit pension plan (“Pension Plan”), and the Pension Benefit Guaranty Corporation (“PBGC”) entered into an Agreement for Appointment of Trustee and Termination of Plan (the “Termination Agreement”) (a) terminating the Pension Plan, (b) establishing March 9, 2013 as the Plan’s termination date and (c) appointing the PBGC as statutory trustee of the Pension Plan.
In connection with the Termination Agreement, on April 21, 2015, the Company entered into the Pension Settlement Agreement with the PBGC to settle all liabilities of the Pension Plan including any termination premium resulting from the Pension Plan termination (the “Settled ERISA Liabilities”). Pursuant to the Pension Settlement Agreement, the Company agreed to (a) pay to the PBGC a total of $10,500, with $1,500 due within ten days following the effective date of the Pension Settlement Agreement and the remainder paid in twelve annual installments of $750 beginning on October 31, 2015 (the “Pension Settlement Obligation”) and (b) issue within ten days following the effective date of the Pension Settlement Agreement 88,117 shares of the Company’s treasury stock in the name of the PBGC. The Pension Settlement Agreement further provides that the PBGC will be deemed to have released the Company from all Settled ERISA Liabilities upon payment of the Pension Settlement Obligation. In the event of a
32
default by the Company of its obligations under the Pension Settlement Agreement or the underlying agreements which secure the Pension Settlement Obligation, the PBGC may enforce payment of the Settled ERISA Liabilities, which would accrue interest at various rates until payment is made and be reduced by any payments made by the Company pursuant to the Pension Settlement Agreement. The estimated total Settled ERISA Liabilities as of the settlement date is $46,000.
To secure the Company’s obligations under the Pension Settlement Agreement, on April 21, 2015, the Company also entered into a Security Agreement with the PBGC (the “Security Agreement”), and executed an Open-End Mortgage in favor of the PBGC (the “Mortgage”) on certain real property owned by the Company’s subsidiary, Spitz, Inc. (“Spitz”). The Security Agreement and Mortgage grant to the PBGC a security interest on all of the Company’s presently owned and after-acquired property and proceeds thereof, free and clear of all liens and other encumbrances, except those described therein (the “Senior Liens”). The PBGC’s security interest in the Company’s property is subordinate to the Company’s two senior lenders pursuant to the Security Agreement and agreements between the PBGC and the lenders (the “Intercreditor Agreements”). The Intercreditor Agreements provide for the lenders to extend credit to the Company, secured by the Senior Liens, up to specified limits. The Intercreditor Agreement between the lender of the mortgage notes and line of credit (see Note 8) and the PBGC provides for total aggregate loans of up to $6,500 secured by Senior Liens on Spitz assets. The second Intercreditor Agreement between another lender and the PBGC provides for up to $3,000 of letter of credit indebtedness secured by Senior Liens on cash deposits.
The balance of the Pension Settlement Obligation is recorded on the balance sheet as of December 31, 2018 and 2017 as follows:
|
2018
|
|
2017
|
Current portion of pension settlement obligation
|
$ 438
|
|
$ 409
|
Pension settlement obligation, net of current portion
|
4,042
|
|
4,478
|
Total Pension Settlement Obligation
|
$ 4,480
|
|
$ 4,887
|
Supplemental Executive Retirement Plan (SERP)
The SERP provides eligible former executives, employed by the Company prior to 2002, defined pension benefits based on average salary, years of service and age at retirement. The SERP was amended in 2002 to discontinue further SERP gains from future salary increases and close the SERP to new participants.
Obligations and Funded Status for SERP
E&S uses a December 31 measurement date for the SERP.
Information concerning the obligations, plan assets and funded status of employee retirement defined benefit plans are provided below:
33
Changes in benefit obligation
|
2018
|
|
2017
|
|
|
|
|
Projected benefit obligation - beginning of year
|
$ 4,650
|
|
$ 4,851
|
Interest cost
|
136
|
|
156
|
Actuarial loss (gain)
|
(119)
|
|
103
|
Benefits paid
|
(445)
|
|
(460)
|
Projected benefit obligation - end of year
|
$ 4,222
|
|
$ 4,650
|
|
|
|
|
Changes in plan assets
|
2018
|
|
2017
|
|
|
|
|
Contributions
|
$ 445
|
|
$ 460
|
Benefits paid
|
(445)
|
|
(460)
|
Fair value of plan assets - end of year
|
$ -
|
|
$ -
|
|
|
|
|
Net amount recognized
|
2018
|
|
2017
|
|
|
|
|
Unfunded status
|
$ (4,222)
|
|
$ (4,650)
|
Unrecognized net actuarial loss
|
1,976
|
|
2,176
|
Net amount recognized
|
$ (2,246)
|
|
$ (2,474)
|
Amounts recognized in the consolidated balance sheets consisted of:
|
2018
|
|
2017
|
|
|
|
|
Accrued liability
|
$ (4,222)
|
|
$ (4,650)
|
Accumulated other comprehensive loss
|
1,976
|
|
2,176
|
Net amount recognized
|
$ (2,246)
|
|
$ (2,474)
|
Components of net periodic benefit cost:
|
2018
|
|
2017
|
|
|
|
|
Interest cost
|
$ 136
|
|
$ 156
|
Amortization of actuarial loss
|
81
|
|
75
|
Amortization of prior year service cost
|
-
|
|
-
|
Net periodic benefit expense
|
$ 217
|
|
$ 231
|
Additional information
Pension expense was $217 and $231 for the years ended December 31, 2018 and 2017, respectively, which consisted of net periodic benefit expense for the SERP.
The SERP minimum liability recorded in other comprehensive loss decreased $200 in 2018 compared to an increase of $30 in 2017. The decrease in 2018 was primarily due to an increase in the discount rate and change to the mortality table offset by an increase due to the change to payout assumption. The increase in 2017 was caused by a decrease in the discount rate, partly offset by a change to the mortality table.
Assumptions
The weighted average assumptions used to remeasure benefit obligations as of December 31, 2018 and 2017 included a discount rate of 3.8% and 3.1%, respectively, for the SERP. The weighted average assumptions used to
34
determine net periodic cost for the years ended December 31, 2018 and 2017 included a discount rate of 3.8% and 3.1%, respectively, in each year for the SERP.
In prior years, for persons who have not yet commenced benefits, it was assumed that installment payments would commence on the valuation date and continue for 10 years. That assumption was changed such that if an individual has not yet commenced benefit payments, the first payment would be a one-time lump sum equal to installments in arrears plus future installments commencing on the valuation date and continuing through the original end date assuming payments had commenced on the expected start date.
Cash Flows
Employer contributions
The Company is not currently required to fund the SERP. All benefit payments are made by E&S directly to those who receive benefits from the SERP. As such, these payments are treated as both contributions and benefits paid for reporting purposes.
The Company expects to contribute and pay benefits of approximately $621 related to the SERP in 2019.
Estimated future benefit payments
As of December 31, 2018, the following benefits are expected to be paid based on actuarial estimates and prior experience:
|
|
|
Years Ending December 31,
|
|
SERP
|
2019
|
|
$ 621
|
2020
|
|
$ 426
|
2021
|
|
$ 414
|
2022
|
|
$ 407
|
2023
|
|
$ 392
|
2024-2028
|
|
$ 1,527
|
401(k) Deferred Savings Plan
The Company has a deferred savings plan that qualifies under Section 401(k) of the Internal Revenue Code. The 401(k) plan covers all employees of the Company who have at least one year of service and who are age 18 or older. Matching contributions of 50% are made on the first 6% of employee contributions after the employee has achieved one year of service. Extra matching contributions can be made based on profitability and other financial and operational considerations. Effective January 1, 2017, the Company started making a 3% contribution in addition to the matching contribution. Contributions to the 401(k) plan for 2018 and 2017 were $444 and $451, respectively.
35
Note 8 –Debt
Long-term debt consisted of the following as of December 31, 2018 and 2017:
|
2018
|
|
2017
|
First mortgage note payable due in monthly installments of $23 (interest
at 5.75%) through January 1, 2024; payment and rate subject to
adjustment every 3 years, next adjustment January 14, 2021
|
$ 1,221
|
|
$ 1,422
|
Second mortgage note payable due in monthly installments of $4 (interest
at 5.99%) through October 1, 2028; payment and rate subject to
adjustment every 5 years, next adjustment October 1, 2023
|
319
|
|
342
|
|
|
|
|
Total debt
|
1,540
|
|
1,764
|
|
|
|
|
Current portion of long-term debt
|
(237)
|
|
(224)
|
Long-term debt, net of current portion
|
$ 1,303
|
|
$ 1,540
|
Principal maturities on total debt are as follows:
Years Ending December 31,
|
|
|
2019
|
|
$ 237
|
2020
|
|
251
|
2021
|
|
267
|
2022
|
|
283
|
2023
|
|
299
|
Thereafter
|
|
203
|
Total debt
|
|
$ 1,540
|
36
Mortgage Notes
The first mortgage note payable represents the balance on a $3,200 note (“First Mortgage Note”) issued on January 14, 2004 by Spitz. The First Mortgage Note requires repayment in monthly installments of principal and interest over 20 years.
On January 14, 2006 and each third anniversary thereof, the interest rate on the First Mortgage Note is adjusted to the greater of 5.75% or 3% over the
Three-Year Constant Maturity Treasury Rate published by the United States Federal Reserve (“3YCMT”). The monthly installment is recalculated on the first month following a change in the interest rate. The recalculated monthly installment is equal to the monthly installment sufficient to repay the principal balance, as of the date of the change in the interest rate, over the remaining portion of the original 20-year term. On January 14, 2018, the 3YCMT was 2.09% and the interest rate on the First Mortgage Note remained at 5.75% per annum. As a result, the monthly installment amount remained at $23.
The second mortgage note payable represents the balance on a $500 note (“Second Mortgage Note”) issued on September 11, 2008 by Spitz. The Second Mortgage Note requires repayment in monthly installments of principal and interest over 20 years. On October 1, 2013 and each fifth anniversary thereof, the interest rate on the Second Mortgage Note is adjusted to the greater of 5.75% or 3% over the Five-Year Constant Maturity Treasury Rate published by the United States Federal Reserve (“5YCMT”). The monthly installment is recalculated on the first month following a change in the interest rate. The recalculated monthly installment is equal to the monthly installment sufficient to repay the principal balance, as of the date of the change in the interest rate, over the remaining portion of the original 20-year term. On October 1, 2018, the fifth anniversary of the Second Mortgage Note, the 5YCMT was 2.99%. As a result, interest was adjusted to 5.99%. The monthly installment remains at $4.
The Mortgage Notes are secured by the real property occupied by Spitz pursuant to a Mortgage and Security Agreement. The real property had a carrying value of $3,973 as of December 31, 2018. The Mortgage Notes are guaranteed by E&S.
Line of Credit
The Company is a party to a line-of-credit agreement with a commercial bank which permits borrowings of up to $1,100 to fund Spitz working capital requirements. Under the line of credit agreement, interest is charged on amounts borrowed at the lender’s prime rate less 0.25%. Any borrowings under the Credit Agreement are secured by Spitz real and personal property and all of the outstanding shares of Spitz common stock. The line-of-credit agreement and mortgage notes (with the same commercial bank) contain cross default provisions whereby a default on either agreement will result in a default on both agreements. There were no borrowings outstanding under the line-of-credit agreement as of December 31, 2018.
Note 9 - Income Taxes
Income tax for 2018 and 2017 consisted of an expense of $21 and a benefit of $(111), respectively, of federal and state income taxes. The actual expense differs from the expected tax expense (benefit) as computed by applying the U.S. federal statutory income tax rate of 21 and 34 percent for 2018 and 2017, respectively, as follows:
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Income tax provision at U.S. federal statutory rate
|
|
|
$ 791
|
|
$ 466
|
State tax provision, net of federal income tax
|
|
|
116
|
|
48
|
Change in valuation allowance attributable to operations
|
|
|
(3,114)
|
|
(25,093)
|
Change in effective tax rate
|
|
|
111
|
|
22,311
|
Stock compensation
|
|
|
30
|
|
570
|
True-up adjustments and expiration of tax carryforwards and credits
|
|
2,105
|
|
1,568
|
Other, net
|
|
|
(18)
|
|
19
|
Income tax expense (benefit)
|
|
|
$ 21
|
|
$ (111)
|
37
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities as of December 31, 2018 and 2017 are as follows:
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Property and equipment, principally due to differences in depreciation
|
|
$ 68
|
|
$ 71
|
Inventory reserves and other inventory-related temporary basis differences
|
|
437
|
|
361
|
Warranty, vacation, deferred rent and other liabilities
|
|
|
251
|
|
371
|
Retirement liabilities
|
|
|
543
|
|
645
|
Net operating loss carryforwards
|
|
|
35,532
|
|
38,536
|
Credit carryforwards
|
|
|
28
|
|
27
|
Other
|
|
|
181
|
|
143
|
Total deferred income tax
|
|
|
37,040
|
|
40,154
|
Less valuation allowance
|
|
|
(37,040)
|
|
(40,154)
|
Net deferred income tax
|
|
|
$ -
|
|
$ -
|
Worldwide income before income taxes consisted of the following:
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
United States
|
|
|
$ 3,768
|
|
$ 1,370
|
International
|
|
|
-
|
|
-
|
Total
|
|
|
$ 3,768
|
|
$ 1,370
|
Income tax expense (benefit) consisted of the following:
|
|
|
2018
|
|
2017
|
Current
|
|
|
|
|
|
U.S. federal
|
|
|
$ (1)
|
|
$ (8)
|
State
|
|
|
22
|
|
(103)
|
Total current expense (benefit)
|
|
|
$ 21
|
|
$ (111)
|
Deferred
|
|
|
|
|
|
U.S. federal
|
|
|
$ 1,477
|
|
$ 23,012
|
State
|
|
|
1,637
|
|
2,081
|
Total
|
|
|
3,114
|
|
25,093
|
Valuation allowance increase
|
|
|
(3,114)
|
|
(25,093)
|
Total deferred expense (benefit)
|
|
|
-
|
|
-
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
|
$ 21
|
|
$ (111)
|
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
E&S has total federal net operating loss carryforwards of approximately $161,541 which expire from 2020 through 2036. The Company has federal minimum tax credit carryforwards of approximately $28 which do not expire. The Company has $3,400 of federal research credits that begin to expire in 2019 and $1,100 of state research credits that begin to expire in 2019. The Company has not recorded a benefit for these research credits in the financial statements because it does not meet the more-likely-than-not position recognition threshold. E&S also has state net operating loss carryforwards of approximately $34,500 that expire at various dates depending on the rules of the states to which the loss or credit is allocated.
38
The Company evaluates its deferred tax assets for realizability based on all of the available positive and negative evidence. Due to cumulative losses and the significance of the carryforwards, the Company determined that it is more likely than not that the deferred tax assets will not be realized. Accordingly, a valuation allowance has been established to offset the net deferred tax assets. During the years ended December 31, 2018 and 2017, the valuation allowance on deferred tax assets decreased by $3,114 and $25,093, respectively.
The Company is subject to audit by the IRS and various states for tax years dating back to 2015. No federal or state tax returns are currently under audit. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Note 10 - Commitments and Contingencies
Letters of Credit
Under
the terms of financing arrangements for letters of credit, E&S is required to maintain a balance in a specific cash account equal to or greater than the outstanding value of all letters of credit or bank guarantees issued, plus other amounts necessary to adequately secure obligations with the financial institution. As of December 31, 2017, there were outstanding letters of credit and bank guarantees of $312 which expired in 2018. As of December 31, 2018, there were outstanding letters of credit and bank guarantees of $220 which are scheduled to expire in 2019.
Note 11 - Stock Option Plan
In 2014, stockholders approved the adoption of the Evans & Sutherland Computer Corporation 2014 Stock Incentive Plan (“2014 Plan”) which replaced the expired 2004 Stock Incentive Plan of Evans & Sutherland Computer Corporation (“2004 Plan”). The 2014 Plan is a stock incentive plan that provides for the grant of options and restricted stock awards to employees and for the grant of options to non-employee directors essentially the same as the 2004 Plan. Under the 2014 Plan, non-employee directors may continue to receive an annual option grant for no more than 10,000 shares. New non-employee directors may also continue to receive an option grant for no more than 10,000 shares upon their appointment or election. With the adoption of the 2014 Plan, no additional options can be issued under the 2004 Plan. Options granted under the 2004 Plan are still held by recipients and will continue to be subject to the terms and conditions of the 2004 plan which are essentially the same as the 2014 Plan. The 2014 Plan continues a minimum exercise price for options of 110% of fair market value on the date of grant. Restricted stock awards may be qualified as a performance-based award that conditions a participant’s award upon achievement by the Company or its subsidiaries of performance goals established by the Board of Directors’ Compensation Committee.
The number of shares, terms, and exercise periods of option grants are determined by the Board of Directors on an option-by-option basis. Options generally vest ratably over three years and expire ten years from the date of grant. As of December 31, 2018, options to purchase 1,001,781 shares of common stock were authorized and reserved for future grant.
39
A summary of activity follows (shares in thousands):
|
2018
|
|
2017
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
Average
|
|
Number
|
|
Exercise
|
|
Number
|
|
Exercise
|
|
of Shares
|
|
Price
|
|
of Shares
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding as of beginning of the year
|
1,610
|
|
$ 0.66
|
|
1,625
|
|
$ 0.88
|
Granted
|
150
|
|
1.12
|
|
141
|
|
1.39
|
Exercised
|
-
|
|
-
|
|
-
|
|
-
|
Forfeited or expired
|
(163)
|
|
1.21
|
|
(156)
|
|
3.61
|
Outstanding as of end of the year
|
1,597
|
|
0.65
|
|
1,610
|
|
0.66
|
|
|
|
|
|
|
|
|
Exercisable as of end of the year
|
1,131
|
|
0.48
|
|
1,089
|
|
0.51
|
The weighted average fair value of options granted during 2018 and 2017 was $0.77 and $1.14, respectively. As of December 31, 2018, options exercisable and options outstanding had a weighted average remaining contractual term of 4.7 and 5.7 years with aggregate intrinsic value of $385 and $385, respectively. As of December 31, 2017, options exercisable and options outstanding had a weighted average remaining contractual term of 4.4 and 5.8 years with aggregate intrinsic value of $566 and $637, respectively.
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the grants made in 2018 and 2017:
|
2018
|
|
2017
|
Expected life (in years)
|
3.5
|
|
3.5
|
Risk free interest rate
|
2.04%
|
|
1.47%
|
Expected volatility
|
125%
|
|
175%
|
Expected option lives and volatilities are based on historical data of the Company. The risk free interest rate is calculated as the average US Treasury bill rate that corresponds with the option life. Historically, the Company has not declared dividends and there are no plans to do so.
As of December 31, 2018, there was approximately $90 of total unrecognized share-based compensation cost related to grants collectively under the 2004 Plan and 2014 Plan that will be recognized over a weighted-average period of 1.9 years. As of December 31, 2017, there was approximately $140 of total unrecognized share-based compensation cost related to grants collectively under the 2004 Plan and 2014 Plan that will be recognized over a weighted-average period of 2.4 years.
Share-based compensation expense, from awards collectively under the 2004 Plan and 2014 Plan for the years ended December 31, 2018 and 2017 amounted to $149 and $177, respectively, and was included in general and administrative expense on the statements of comprehensive income.
Note 12 - Preferred Stock
Class A Preferred Stock
The Company has 5,000,000 authorized shares of Class A Preferred stock. As of December 31, 2018 and 2017, there were no Class A Preferred shares outstanding.
40
Class B Preferred Stock
The Company has 5,000,000 authorized shares of Class B Preferred stock. As of December 31, 2018 and 2017, there were no Class B Preferred shares outstanding.
Note 13 - Significant Customers
As of December 31, 2018, Customer D represented 24% of accounts receivable, and Customer E represented 10% of contract revenue in excess of billings.
As of December 31, 2017, Customers A and B each represented 10% of accounts receivable, and Customer C represented 30% of contract revenue in excess of billings.
For the year ended December 31, 2018, no customers represented 10% or more of total sales. For the year ended December 31, 2017, Customer C represented 11% of total sales.